The Relationship of Related Party Transactions and Characteristics of Corporate Governance on Firm Performance: Evidence from Indonesian Listed Firms

Yunidyastuti, Emy, 2019 The Relationship of Related Party Transactions and Characteristics of Corporate Governance on Firm Performance: Evidence from Indonesian Listed Firms, Flinders University, College of Business, Government and Law

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Abstract

Related party transactions (RPTs) are common practices in a firm‘s business activities. This study examines the relationship between RPTs, corporate governance and firm performance. By using 94 non-financial Indonesian listed firms from 2007 to 2013, this study finds that RPTs have a significantly positive relationship with firm performance. RPTs in the forms of total size of RPTs, RPTs sales, RPTs purchases, RPTs entity, RPTs associates and joint firms and RPTs other affiliates are found to have significant positive relationship with returns on assets (ROA); RPTs liabilities and RPTs shareholders are found to have significant positive association with cash flow from operating activities (CFO) and RPTs person is found to have significant positive relationship with Tobin‘s Q. However, this study also finds that RPTs lending and RPTs entity sub-categorised as shareholders have negative effect on Tobin‘s Q and ROA, respectively.

Characteristics of corporate governance are found to have positive relationship with firm performance. The size of the board of director (BOD) and total size of the BOD and board of commissioner (BOC) are found to have positive relationship with ROA and Tobin‘s Q while the size of the BOC has positive relationship only with Tobin‘s Q. The independence of the BOC and committees established in the BOC have positive relationship with ROA, CFO and Tobin‘s Q. The expertise in finance and/or accounting of audit committee has positive relationship with ROA, but the positive effect is not found on the relationship between the size of audit committee and firm performance. In addition, characteristics of corporate governance in the forms of size of the BOD, size of the BOC, total size of BOD and BOC, independence of the BOC and committees established in the BOC moderate the relationship between several types of RPTs (especially RPTs sales and RPTs purchases) and firm performance. These findings have important implications for policy makers and standard setters, existing and potential shareholders/investors, and firm‘s board members.